Central Transfer and Fiscal Capacity in China: Evidence from the Tax-Sharing System

作者：Sun, Meng; He, Qichun^*

来源：Emerging Markets Finance and Trade, 2018, 54(2): 393-409.

DOI：10.1080/1540496X.2017.1399356

• Common pool problem
• extra-budgetary funds
• fiscal capacity

In 1994, the Chinese government introduced a new fiscal system. Using the provincial panel data during the following period 1995-2010, we find robust evidence that central transfer (measured as the ratio of net central transfer to budgetary expenditure for each province) has a significant, negative effect on the fiscal capacity of a province (the sum of budgetary and extra-budgetary incomes as a percentage of GDP). Therefore, when the central government favors the poor provinces in central transfers (the common pool problem), the rich provinces expand their extra-budgetary income more to avoid predation by the central government, which helps increase the fiscal capacity and thus the market-preserving behavior of the rich provinces. Our result helps explain China's success, which has strong policy implications for other transitional economies.

• 出版日期2018
• 单位中央财经大学; 北京师范大学